The big news that came out of last year’s Cornerstone Research report on securities class-action lawsuits involving accounting allegations was that total settlement value reached nearly $4.5 billion in 2018, the second highest total in the past decade. The big news out of this year’s report is that there were a record number of accounting-related securities class actions filed in 2019.
The latest analysis from Cornerstone Research revealed that there were 169 accounting case filings last year, up 18% from 143 in 2018 and up 2.4% from the previous all-time high of 165 in 2017.
Plus, the total number of accounting case filings in 2019 was nearly double the 2010-2018 average of 86 AND accounting made up the highest percentage (42%) of total class-action filings since 2011, as you can see in the bar graph below.
The wave of accounting-related class actions last year was due to increases in both core filings (5%) and those related to mergers and acquisitions, specifically failing to reconcile a non-GAAP measure to a GAAP measure (29%), Cornerstone Research said.
And M&A accounting case filings skyrocketed in the second half of 2019, increasing from 37 in the first half of the year to 65 in the second half—the most in any semiannual period in the past five years, according to the report:
M&A accounting cases constituted 75 percent of all M&A cases in the second half of 2019 compared to approximately 50 percent in the first half of the year. This is the highest proportion for any half-year period.
Now, on to class-action settlements in 2019. The number of accounting case settlements continued to decline, from 41 in 2018 to 34 last year, according to the analysis. And accounting class actions are no longer a billion-dollar business:
Total accounting case settlement value, which can fluctuate substantially from year to year due to the presence or absence of very large settlements, dropped to $920 million in 2019. There were no settlements exceeding $500 million and only two accounting case settlements over $100 million. The median accounting case settlement increased to $10.5 million, up from $9.7 million 2018, reflecting an upward shift in the size of the typical settlement.
Here’s a chart from the report that summarizes filings and settlements in 2019 compared to 2018:
Other highlights of the report include:
- Defendant firm size: At $1.1 billion, the median market capitalization of issuer defendants in accounting case filings was 43% greater than the 2010–2018 average.
- Restatements: There were 19 core accounting case filings involving financial statement restatements in 2019, up 46% from the previous year. The number of settled cases involving restatements in 2019 was on par with the level in 2018; however, the proportion of those cases involving criminal allegations and/or accounting irregularities was the highest over the last 10 years.
- SEC actions: The proportion of settled accounting cases involving accompanying SEC actions increased in 2019 to 44% of all accounting cases—the highest proportion since 1998.
- Industry: For the second consecutive year, there were more core accounting case filings and accounting case settlements in the consumer non-cyclical sector (including biotechnology, healthcare, and pharmaceutical companies) than any other sector.
What are researchers keeping an eye on for next year’s report? If the COVID-19 pandemic will impact future securities litigation trends. Elaine Harwood, vice president of Cornerstone Research, said:
“Regulators and others are already focusing on the impact of COVID-19 on financial reporting disclosures and processes. We will continue to monitor these developments to determine whether they translate into accounting allegations in future securities class action filings.”
I’m putting my money on accounting case filings involving allegations of internal control weaknesses. How ’bout you?